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Draghi: ECB Stimulus Key Ingredient of Recovery -- 2nd Update

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November 28, 2016

By Todd Buell

European Central Bank President Mario Draghi renewed his call for eurozone politicians to make economic reforms to improve growth, boosting the effectiveness of stimulative monetary policy. He recognized that very low interest rates carry risks to financial stability, yet stressed that currently the greater risk is that low growth in the currency bloc would stall.

Mr. Draghi told a European Parliament committee in Brussels that in 2016, "the euro area economy proved to be resilient, in spite of uncertainty stemming from the economic and political environment."

"Inflation has gradually edged up, and the ECB's monetary stimulus has been a key ingredient of the ongoing recovery," he said.

Protracted periods of low rates are "fertile terrain for financial stability risks," he said, but "right now, the greatest risk comes from impaired growth, from the possibility our recovery doesn't firm and growth stalls," he said.

Mr. Draghi offered little insight into what the bank would do at its Dec. 8 meeting, when many analysts expect it to extend its bond-purchase program. He said the ECB would assess ways to continue the "very substantial degree" of stimulus needed to return inflation to the central bank's medium-term target of close to 2%. The most recent data showed inflation at 0.5% in the 19-country currency bloc.

If governments took decisive action, "monetary policy measures in the euro area could be even more effective," Mr. Draghi added.

"Low productivity growth, legacy problems in the banking sector and limited progress with structural reforms are all issues that need to be tackled swiftly," Mr. Draghi said.

He added that the economic recovery in the U.S. was at a "way more advanced stage" than in Europe, but that it was unclear what the policies of President-elect Donald Trump would mean for interest rates and financial regulation.

Mr. Draghi also gave his home country, Italy, a moderate vote of confidence ahead of a key constitutional referendum taking place on Dec. 4. The ECB head said that Italian debt "is sustainable," noting that the country's borrowing costs had normalized in recent years and that growth in the country "is gradually recovering." Still, he stressed that this didn't leave "room for complacency." Italy has one the highest levels of debt when compared with economic output in the eurozone, leaving it "vulnerable to shocks."

He declined to answer a question asking about potential serious risks that Italian banks could face should Italian citizens vote no in the referendum, an outcomethat could trigger the resignation of the country's prime minister.